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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

|/x/                                          | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended July 31, 2001
|OR                                          
|/ /                                          | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-11807

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UNIFY CORPORATION(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of incorporation or organization)

94-2710559(I.R.S. Employer Identification Number)


2101 Arena Blvd, Suite 100
Sacramento, California 95834(Address of principal executive offices)

Telephone: (916) 928-6400(Registrant's telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /x/  No / /

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

19,981,647
shares of Common Stock, $0.0005 par value, as of August 31, 2001

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UNIFY CORPORATION
FORM 10-Q

INDEX

|          |  |                                                                                                   |  | PAGE
NUMBER
|--------- |  | ------------------------------------------------------------------------------------------------- |  | -----------
|PART I.   |  | FINANCIAL INFORMATION                                                                             |  |            
|Item 1.   |  | Financial Statements                                                                              |  |            
|          |  | Condensed Consolidated Balance Sheets as of July 31, 2001 and April 30, 2001                      |  | 3          
|          |  | Condensed Consolidated Statements of Operations for the three months ended July 31, 2001 and 2000 |  | 4          
|          |  | Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2001 and 2000 |  | 5          
|          |  | Notes to Condensed Consolidated Financial Statements                                              |  | 6          
|Item 2.   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations             |  | 8          
|Item 3.   |  | Disclosures About Market Rate Risk                                                                |  | 13         
|PART II.  |  | OTHER INFORMATION                                                                                 |  |            
|Item 1.   |  | Legal Proceedings                                                                                 |  | 14         
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                  |  | 14         
|SIGNATURE |  | 16                                                                                               

2

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Item 1. Financial Statements

UNIFY CORPORATION  CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)

|                                      |                                                | July 31,
2001                               |       | April 30,
2001 |       
|------------------------------------- | ---------------------------------------------- | ------------------------------------------- | ----- | -------------- | ------
|
|Assets                                |                                                |                                             |       |                |       
|Current assets:                       |                                                |                                             |       |                |       
|                                      | Cash and cash equivalents                      |                                             | $     | 2,583          |       
|                                      | Restricted cash                                |                                             |       | 156            |       
|                                      | Investments                                    |                                             |       | 100            |       
|                                      | Accounts receivable, net                       |                                             |       | 1,722          |       
|                                      | Prepaid expenses and other current assets      |                                             |       | 572            |       
|                                      |                                                |                                             |       |                |       
|                                      |                                                | Total current assets                        |       |                | 5,133 
|Property and equipment, net           |                                                |                                             | 650   |                |       
|Other investments                     |                                                |                                             | 1,850 |                |       
|Other assets                          |                                                |                                             | 120   |                |       
|                                      |                                                |                                             |       |                |       
|                                      |                                                | Total assets                                |       | $              | 7,753 
|                                      |                                                |                                             |       |                |       
|Liabilities and Stockholders' Deficit |                                                |                                             |       |                |       
|Current liabilities:                  |                                                |                                             |       |                |       
|                                      | Accounts payable                               |                                             | $     | 1,446          |       
|                                      | Other accrued liabilities                      |                                             |       | 3,153          |       
|                                      | Accrued compensation and related expenses      |                                             |       | 801            |       
|                                      | Note payable to minority interest stockholders |                                             |       | 324            |       
|                                      | Deferred revenue                               |                                             |       | 3,149          |       
|                                      |                                                |                                             |       |                |       
|                                      |                                                | Total current liabilities                   |       |                | 8,873 
|Stockholders' deficit:                |                                                |                                             |       |                |       
|                                      | Common stock                                   |                                             |       | 10             |       
|                                      | Additional paid-in capital                     |                                             |       | 59,010         |       
|                                      | Note receivable from stockholder               |                                             |       | (60            | )     
|                                      | Accumulated other comprehensive loss           |                                             |       | (660           | )     
|                                      | Accumulated deficit                            |                                             |       | (59,420        | )     
|                                      |                                                |                                             |       |                |       
|                                      |                                                | Total stockholders' deficit                 |       |                | (1,120
|                                      |                                                |                                             |       |                |       
|                                      |                                                | Total liabilities and stockholders' deficit |       | $              | 7,753 
|                                      |                                                |                                             |       |                |       

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See
accompanying notes to condensed consolidated financial statements.

3

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UNIFY CORPORATION  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)  (Unaudited)

|                                                      |                                     | Three Months Ended July 31,                     |      
|----------------------------------------------------- | ----------------------------------- | ----------------------------------------------- | -----
|
|Revenues:                                             |                                     |                                                 |      
|                                                      | Software licenses                   |                                                 | $    
|                                                      | Services                            |                                                 |      
|                                                      |                                     |                                                 |      
|                                                      |                                     | Total revenues                                  |      
|                                                      |                                     |                                                 |      
|Cost of revenues:                                     |                                     |                                                 |      
|                                                      | Software licenses                   |                                                 |      
|                                                      | Services                            |                                                 |      
|                                                      |                                     |                                                 |      
|                                                      |                                     | Total cost of revenues                          |      
|                                                      |                                     |                                                 |      
|Gross margin                                          |                                     |                                                 | 2,501
|                                                      |                                     |                                                 |      
|Operating expenses:                                   |                                     |                                                 |      
|                                                      | Product development                 |                                                 |      
|                                                      | Selling, general and administrative |                                                 |      
|                                                      | Special charges (recovery)          |                                                 |      
|                                                      |                                     |                                                 |      
|                                                      |                                     | Total operating expenses                        |      
|                                                      |                                     |                                                 |      
|                                                      |                                     | Income (loss) from operations                   |      
|Other income, net                                     |                                     |                                                 | 23   
|                                                      |                                     |                                                 |      
|                                                      |                                     | Income (loss) before provision for income taxes |      
|Provision for income taxes                            |                                     |                                                 | 22   
|                                                      |                                     |                                                 |      
|                                                      |                                     | Net income (loss)                               |      
|                                                      |                                     |                                                 |      
|Net income (loss) per share:                          |                                     |                                                 |      
|                                                      | Basic                               |                                                 | $    
|                                                      |                                     |                                                 |      
|                                                      | Diluted                             |                                                 | $    
|                                                      |                                     |                                                 |      
|Shares used in computing net income (loss) per share: |                                     |                                                 |      
|                                                      | Basic                               |                                                 |      
|                                                      |                                     |                                                 |      
|                                                      | Diluted                             |                                                 |      
|                                                      |                                     |                                                 |      

See
accompanying notes to condensed consolidated financial statements.

4

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UNIFY CORPORATION  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)  (Unaudited)

|                                               |                                                                      | Three Months
Ended July 31,                  |                                          
|---------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:          |                                                                      |                                              |                                          
|                                               | Net Income (loss)                                                    |                                              | $                                        
|                                               | Reconciliation of net loss to net cash used in operating activities: |                                              |                                          
|                                               |                                                                      | Depreciation                                 |                                          
|                                               |                                                                      | Changes in operating assets and liabilities: |                                          
|                                               |                                                                      |                                              | Accounts receivable                      
|                                               |                                                                      |                                              | Prepaid expenses and other current assets
|                                               |                                                                      |                                              | Accounts payable                         
|                                               |                                                                      |                                              | Accrued compensation and related expenses
|                                               |                                                                      |                                              | Other accrued liabilities                
|                                               |                                                                      |                                              | Deferred revenue                         
|                                               |                                                                      |                                              |                                          
|                                               |                                                                      |                                              |                                          
|                                               |                                                                      |                                              |                                          
|Cash flows from investing activities:          |                                                                      |                                              |                                          
|                                               | Purchases of available-for-sale securities                           |                                              |                                          
|                                               | Maturities/sales of available-for-sale securities                    |                                              |                                          
|                                               | Increase in restricted cash                                          |                                              |                                          
|                                               | Purchases of property and equipment                                  |                                              |                                          
|                                               | Other assets                                                         |                                              |                                          
|                                               |                                                                      |                                              |                                          
|                                               |                                                                      |                                              |                                          
|                                               |                                                                      |                                              |                                          
|Cash flows from financing activities:          |                                                                      |                                              |                                          
|                                               | Proceeds from issuance of common stock, net                          |                                              |                                          
|                                               | Repayment of note payable to minority interest stockholders          |                                              |                                          
|                                               |                                                                      |                                              |                                          
|                                               | Net cash provided by (used in) financing activities                  |                                              |                                          
|                                               |                                                                      |                                              |                                          
|Effect of exchange rate changes on cash        |                                                                      |                                              | (19                                      
|                                               |                                                                      |                                              |                                          
|Net decrease in cash and cash equivalents      |                                                                      |                                              | (401                                     
|Cash and cash equivalents, beginning of period |                                                                      |                                              | 2,984                                    
|                                               |                                                                      |                                              |                                          
|Cash and cash equivalents, end of period       |                                                                      | $                                            | 2,583                                    
|                                               |                                                                      |                                              |                                          
|Supplemental cash flow information:            |                                                                      |                                              |                                          
|Cash paid during the period for:               |                                                                      |                                              |                                          
|                                               | Interest                                                             |                                              | $                                        
|                                               |                                                                      |                                              |                                          
|                                               | Income taxes                                                         |                                              | $                                        
|                                               |                                                                      |                                              |                                          

See
accompanying notes to condensed consolidated financial statements.

5

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UNIFY CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Basis of Presentation

The condensed consolidated financial statements have been prepared by Unify Corporation ("the Company") pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). While the interim financial information contained in this filing is unaudited, such financial statements reflect all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair presentation. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.
These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2001 as filed with the SEC.

2. Results of Operations and Management's Plan

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed consolidated financial statements for the three month period ended July 31, 2001, the
Company recorded net income of $14,000 and has an accumulated deficit of $59,420,000. For the year ended April 30, 2001, the Company incurred a net loss of $12,331,000 and had an accumulated
deficit of $59,434,000 as of April 30, 2001. These factors indicate that the Company may potentially be unable to continue as a going concern.

The
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to
continue to generate sufficient cash flows to meet its obligations on a timely basis, the ability to continue to work with key vendors to accept payment terms for certain payables, to obtain
additional financing or refinancing as may be required, and ultimately to return to profitability and significant positive cash flows. Management restructured the Company and significantly reduced
operating expenses during fiscal 2001. Management plans to grow revenues, increase the investment in marketing while aggressively controlling costs, and seek additional financing that is acceptable to
the Company. There is no assurance that management's plans will be successful or if successful, that they will result in the Company continuing as a going concern.

3. Acquisitions and Divestitures

In June 2000, the Company acquired privately-held Unify InterAmerica, the Company's master distributor in Latin America. The acquisition was
in support of Unify's strategy to rapidly expand into the growing Latin America e-commerce market. After review of this strategy by the Company's new management, the Company determined
Latin America was currently not a strategic market. In September 2000, the original stockholders agreed to repurchase Unify InterAmerica, which resulted in the Company recording a loss, in the
second quarter of fiscal 2001 of approximately $400,000.

4. Earnings Per Share

SFAS No. 128,Earnings Per Share,requires a dual presentation of basic and diluted income (loss) per
share ("EPS"). Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average of common shares outstanding for the

6

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period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (e.g. convertible preferred stock, warrants, and common stock options) were
exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded for fiscal year 2001 as their effect would be antidilutive. The following is a
reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations for the periods indicated (in thousands, except per share amounts):

Three Months
Ended July 31,2001

2000Net Income (Loss) (Numerator):Net income (loss), basic and diluted

$
14

$
(3,649
)Shares (Denominator):Weighted average shares of common stock outstanding, basic


19,462


18,880Weighted average common equivalent shares outstanding


464


Weighted average shares of common stock outstanding, diluted


19,926


18,880Per Share Amount:Net income (loss) per share, basic

$
0.00

$
(0.19
)Reduction in net income per share due to Weighted average common equivalent shares


0.00


0.00Net income (loss) per share, diluted

$
0.00

$
(0.19
)Antidilutive Shares:





1,027


5. Comprehensive Income (Loss)

The Company's total comprehensive income (loss) for the periods shown was as follows:

Three Months
Ended July 31,2001

2000Net income (loss)

$
14

$
(3,649
)Foreign currency translation


(9
)

24Unrealized holding gain arising during period





39Total comprehensive income (loss)

$
5

$
(3,586
)


6. Special Charges

In July 2000, the Company announced that certain matters had come to the attention of the Company's Board of Directors that indicated that the Company
had engaged in improper accounting practices. Accordingly, the Board of Directors authorized its Audit Committee to conduct an investigation of the Company's accounting and financial reporting
practices and to recommend remedial action, if any. As a result of this financial reporting investigation, the Company incurred additional costs during fiscal 2001 related to the investigation itself,
legal expenses and additional auditing costs of $370,000 for the three month period ended July 31, 2000 and $3,356,000 for the year ended April 30, 2001. During the three month period
ended July 31, 2001, the Company negotiated a $225,000 reduction in previously expensed accounting costs related to the investigation and incurred an additional $84,000 in legal expenses as a
result of the on going regulatory investigation and litigation.

7

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UNIFY CORPORATION

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the software
industry and certain assumptions made by the Company's management. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are
difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not
limited to, those set forth herein under "Volatility of Stock Price and General Risk Factors Affecting Quarterly Results" and in the Company's Annual Report on Form 10-K under
"BusinessRisk Factors." Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the SEC, particularly the Company's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

The
following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly
Report on Form 10-Q and with the audited Consolidated Financial Statements and Notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results
of Operations, which are included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2001 as filed with the SEC.

Results of Operations

The Company develops, markets and supports database and application development and deployment software and services. Unify's products are designed to ensure
that companies are able to better compete by enabling them to quickly and cost-effectively implement successful business solutions. Whether a company is developing database, client/server
or e-commerce applications, or seeking to make existing applications accessible via a Web interface, Unify's products and services help companies solve some of their biggest IT challenges.
Unify's software addresses these challenges by increasing
developer productivity and by allowing customers to deliver applications with a low total cost of ownership in the application product life cycle.

Unify's
customers consist primarily of independent software vendors ("ISVs"), value added resellers ("VARs"), corporate information technology ("IT") departments, solutions
integrators ("SIs") and distributors. The Company sells its products to these markets through its e-commerce site and direct sales organizations in the United States, United Kingdom,
France and Japan, and indirectly to end-users through its worldwide network of distributors and VARs.

The
Company recognizes software license revenue when a noncancelable license agreement has been executed, delivery has occurred, fees are fixed and determinable, and collection of the
resulting receivables is deemed probable by management. Service revenue includes support revenue, which is recognized ratably over the support period (generally a one year term), and revenue from
consulting and training services, which is recognized as services are performed. Fees for support are billed in advance and included in deferred revenue until recognized. The Company's revenue
recognition policies are in compliance with the provisions of the American Institute of Certified Public Accountant's Statement of Position No. 97-2, Software Revenue Recognition.

8

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Fiscal 2001 Operations

In July 2000, the Company announced that certain matters had come to the attention of the Company's Board of Directors that indicated that the Company
had engaged in improper accounting practices during fiscal 2000. Accordingly, the Board of Directors authorized its Audit Committee to conduct an investigation of the Company's accounting and
financial reporting practices and to recommend remedial action, if any. In July 2000, in connection with the ongoing investigation, the Company placed its former chief executive officer and its
former chief financial officer on administrative leave, and in November 2000, the Company terminated its former chief executive officer and its former chief financial officer resigned. As a
result of this financial reporting investigation, the Company incurred significant costs during fiscal 2001 related to the investigation itself, legal expenses and additional auditing costs. In
addition, the majority of the U.S. based sales team resigned or were terminated during the first quarter of fiscal 2001, which had a significant negative impact on the Company's revenues for fiscal
2001.

Revenues

Total revenues for the quarter ended July 31, 2001 increased 7% over the same quarter of the prior year to $3.0 million. The increase was largely
driven by service revenues, which increased by $0.2 million, or
14%, to $1.6 million in the first quarter of fiscal 2002, compared to $1.4 million during the same quarter of the prior year. Software license revenues decreased 7% to
$1.4 million from $1.5 million for the same comparative period, due primarily to the general economic downturn that has affected the entire technology industry during recent quarters.

International
revenues include all software license and service revenues from customers located outside the United States. International revenues from the Company's direct sales
organizations in Europe and Japan and from value added resellers, distributors, and other partners in all international locations accounted for 57% of total revenues in the quarters ended
July 31, 2001 and 2000 respectively.

Cost of Revenues

The Company's cost of revenues include cost of software licenses and cost of services. Cost of software licenses consist primarily of product documentation,
packaging and production costs in the U.S. and Japan, and royalties paid for licensed technology. Cost of services consist primarily of employee, facilities and travel costs incurred in providing
customer support under software maintenance contracts, and consulting and training services. Total cost of revenues as a percentage of total revenues decreased to 18% in the first quarter of fiscal
2002 from 50% for the first quarter of fiscal 2001.

In
absolute dollars, cost of software licenses decreased by 61% in the first quarter of 2002 as compared to the same period of fiscal 2001. The decrease in the cost of software
license revenues reflects the effect of cost control measures that were initiated late in the second quarter of fiscal 2001 to control fixed period costs. The mismatch in revenues and expenses will
vary from quarter to quarter and is the result of differences between revenue recognition and the recording of expenses, which for the most part are fixed as period costs.

Total
cost of services decreased 67% to $0.4 million in the first quarter of fiscal 2002 from $1.2 million during the same period in fiscal 2001. The cost of service has
a high component of fixed costs, and therefore does not fluctuate as readily with the changes in revenues, however, the decrease in fiscal 2002 reflects the cost reduction measures that were initiated
in the second quarter of fiscal 2001 and the significant reduction in the use of contract labor.

9

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Product Development

Product development expenses consist primarily of employee and facilities costs incurred in the development and testing of new products and in the porting of
new and existing products to additional hardware platforms and operating systems. For the first three month period of fiscal 2002, product development expenses decreased 31% to $1.1 million
from $1.6 million, as compared to the comparative three month period of fiscal 2001. The decrease was primarily the result of a reduction in the work force in October 2000 which resulted
in a 47% reduction in the product development staff. Product development costs as a percentage of total revenues during the first quarter of fiscal 2002 was 37% of total revenues as compared to 57%
for the first quarter of fiscal 2001. The Company believes that investments in product development is critical to maintaining technological leadership and therefore intends to continue to devote
resources to product development.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses for the quarter ended July 31, 2001 decreased 53% to $1.5 million, or 50% of total
revenues, as compared to $3.2 million, or 110% of total revenues, for the same quarter of the prior year. The major components of SG&A for the first three months of fiscal 2002 were sales
expenses of $0.9 million, marketing expenses of $0.2 million, general and administrative of $0.6 million and bad debt recovery of $0.2 million. Sales expenses decreased
$0.6 million as a result of the restructuring and rebuilding of the Company's worldwide sales model. During the first quarter of fiscal 2002, the Company transitioned key customers and regions
in Europe to a direct sales model. Marketing expenses decreased by $0.3 million during the same two comparative periods. General and administrative expenses decreased by $0.2 million,
from $0.8 million during the same period in fiscal 2001, primarily as the result of bonuses paid to former management in fiscal 2001 and the quarter to quarter fluctuations that occur
throughout the year. As a result of management's continuing revenue evaluation process, the performance and quality of its outstanding receivables has improved, and as a result, the Company had a net
recovery of prior bad debt expense of $0.2 million during the three month ended July 31, 2001 as compared to the comparable period for the prior fiscal year. The Company expects that
total SG&A expenses may fluctuate from quarter to quarter primarily because of variability in marketing program spending and sales commission expense.

Special Charges

In July 2000, the Company announced that certain matters had come to the attention of the Company's Board of Directors that indicated that the Company
had engaged in improper accounting practices during fiscal 2000. Accordingly, the Board of Directors authorized its Audit Committee to conduct an investigation of the Company's accounting and
financial reporting practices and to recommend remedial action, if any. As a result of this financial reporting investigation, the company incurred additional costs during fiscal 2001 related to the
investigation itself, legal expenses and additional auditing costs of $370,000 for the three month period ended July 31, 2000 and $3,356,000 for the year ended April 30, 2001. During the
three month period ended July 31, 2001, the Company negotiated a $225,000 reduction in previously expensed accounting costs related to the investigation and incurred an additional $84,000 in
legal expenses as a result of the on going regulatory investigation and litigation.

Provision for Income Taxes

The Company recorded tax provisions for the quarters ended July 31, 2001 and 2000 related primarily to foreign income taxes and withholding taxes on
software license royalties paid to the Company by certain foreign licensees. For the same periods, the Company recorded no significant federal or state income tax provisions as the Company had
substantial net operating loss carryforwards.

10

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Liquidity and Capital Resources

At July 31, 2001, the Company had cash, cash equivalents and short-term investments of $2.7 million, compared to $3.1 million
at April 30, 2001. Working capital improved to a negative $3.7 million at July 31, 2001 from a negative $3.9 million at April 30, 2001.

The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying condensed consolidated financial statements for the three month period ended July 31, 2001, the Company recorded net
income of $14,000 and had an accumulated deficit of $59,420,000. For the year ended April 30, 2001, the Company incurred a net loss of $12,331,000, and has an accumulated deficit of $59,434,000
as of April 30, 2001.

During
fiscal 2001, the Company has experienced a decline in revenues and incurred significant special charges as a result of the Audit Committee's investigation. The Company is
focused on growing revenues but has had limited success to date. Additionally, the Company may continue to incur significant expenses in defense of the shareholder litigation that has been brought as
a result of the investigation. These factors indicate that the Company may potentially be unable to continue as a going concern.

The
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to
continue to generate sufficient cash flows to meet its obligations on a timely basis, the ability to continue to work with key vendors to accept payment terms for certain payables, to obtain
additional financing or refinancing as may be required, and ultimately to return to profitability and significant positive cash flows.

Management
restructured the Company and significantly reduced operating expenses during fiscal 2001. Management plans to grow revenues, increase the investment in marketing, while
aggressively controlling costs, and seek additional financing that is acceptable to the Company. There is no assurance that management's plans will be successful or if successful, that they will
result in the Company continuing as a going concern. The Company's ability to obtain additional financing on acceptable terms may be adversely affected by the delisting of the Company's Common Stock
from the NASDAQ National Market. If adequate funds are not available to satisfy the Company's short-term or long-term capital requirements, the Company may be required to
significantly reduce its operations. Additionally, the sale of additional equity or other securities will result in dilution of the Company's stockholders.

The
Company's operating activities resulted in a decrease in cash of $0.4 million during the three months ended July 31, 2001, as compared to a decrease of
$0.1 million for the same period in the prior year. The decrease in cash provided by operating activities of $0.2 million for the first quarter of fiscal 2002 was primarily from
decreases in accounts payable of $0.4 million, decreases in accrued compensation and related expenses of $0.2 million, decreases in other accrued liabilities of $0.2 million and a
decrease in deferred revenues of $0.5 million, partially offset by decreases in accounts receivable and prepaid expenses and other current assets of $1.1 million and depreciation
expenses of $0.1 million. Investing activities during the period used cash of $0.1 million, consisting of increases in restricted cash and the purchase of property and equipment of
$0.1 million. Cash used in financing activities during the period was $0.1 million, which represented proceeds from the issuance of common stock under the Company's stock option and
stock purchase plans of $0.1 million offset by the reduction in the note payable to minority interest stockholders of $0.2 million.

11

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Volatility of Stock Price and General Risk Factors Affecting Quarterly Results

The Company's common stock price has been and is likely to continue to be subject to significant volatility. A variety of factors could cause the price of the
Company's common stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company's business; fluctuations in the Company's or its competitors' operating
results and order levels; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its
competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; and developments in the Company's relationships with its
customers, distributors and suppliers; legal proceedings brought against the Company or its officers; and significant changes in the Company' senior management team. In addition, in recent years the
stock market in general, and the market for shares of equity securities of many high technology companies in particular, has experienced extreme price fluctuations which have often been unrelated to
the operating performance of those companies. Such fluctuations may adversely affect the market price of the Company's common stock.

The
Company's quarterly operating results have varied significantly in the past, and the Company expects that its operating results are likely to vary significantly from time to time
in the future. Such variations result from, among other factors, the following: the size and timing of significant orders and their fulfillment; demand for the Company's products; the number, timing
and significance of product enhancements and new product announcements by the Company and its competitors; ability of the Company to attract and retain key employees; seasonality; changes in pricing
policies by the Company or its competitors; realignments of the Company's organizational structure; changes in the level of the Company's operating expenses; changes in the Company's sales incentive
plans; budgeting cycles of the Company's customers; customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors; product life cycles; product
defects and other product quality problems; currency fluctuations; and general domestic and international economic and political conditions.

Due
to the foregoing factors, quarterly revenues and operating results are difficult to forecast. Revenues are also difficult to forecast because the market for Internet and
e-commerce application development software is rapidly evolving, and the Company's sales cycle, from initial evaluation to purchase and the provision of maintenance services, is lengthy
and varies substantially from customer to customer. Because the Company normally ships products within a short time after it receives an order, it typically does not have any material backlog. As a
result, to achieve its quarterly revenue objectives, the Company is dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders
toward the end of a fiscal quarter, the Company generally recognizes a substantial portion of its revenues at the end of a quarter. As the Company's expense levels are based in significant part on the
Company's expectations as to future revenues and are therefore relatively fixed in the short term, if revenue levels fall below expectations operating results are likely to be disproportionately
adversely affected. The Company also expects that its operating results will be affected by seasonal trends, also anticipates that it may experience relatively weaker demand in fiscal quarters ending
July 31 and October 31 as a result of reduced business activity in Europe during the summer months.

The
matters raising doubt about the ability of the Company to continue as a going concern as discussed in Note 2 to the condensed consolidated financial statements and Item 2,
and the pending litigation discussed above, may have an adverse effect on the Company's future sales and its ability to attract and retain qualified personnel. The Company's products are typically
used to develop applications that are critical to a customer's business. Customers may be unwilling to build their business applications around the Company's products because the Company's ability to
continue supporting its products may be in doubt in the future.

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Item 3. Disclosures about Market Rate Risk

Interest Rate Risk.The Company's exposure to market rate risk for changes in interest rates relates primarily to its
investment portfolio, which consists of cash equivalents and investments. Cash equivalents are highly liquid investments with original maturities of three months or less and are stated at cost. Cash
equivalents are generally maintained in money market accounts which have as their objective preservation of principal and which hold investments with maturity dates of less than 90 days. The
Company does not believe its exposure to interest rate risk is material for these balances, which totaled $2.7 million at July 31, 2001. The securities in the Company's investment
portfolio are generally classified as available-for-sale and, consequently, are recorded on the consolidated balance sheet at fair value with unrealized gains or losses
reported as a separate component of stockholders' equity. Investments totaled $0.1 million at July 31, 2001 and there were no material realized or unrealized gains or losses on
investments during the first quarter of fiscal 2002. Unify does not use derivative financial instruments in its investment portfolio, places its investments with high quality issuers and, by policy,
limits the amount of credit exposure to any one issuer. The Company is adverse to principal loss and attempts to ensure the safety of its invested funds by limiting default. The Company's investments
at July 31, 2001 consisted of $0.1 million in high quality corporate bonds maturing within one year, which the Company does not believe carry any material interest rate exposure. If
market interest rates were to change immediately and uniformly by ten percent from levels at July 31, 2001, the fair value of the Company's cash equivalents and investments would change by an
insignificant amount.

Foreign Currency Exchange Rate Risk.As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's business, operating results and financial position.
Historically, the Company's primary exposures have related to local currency denominated sales and expenses in Europe, Japan and Australia. Due to the substantial volatility of currency exchange
rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on its future operating results. Although Unify takes into account changes in exchange rates over time
in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The
Company also has currency exchange rate exposures on intercompany accounts receivable owed to the Company as a result of local currency sales of software licenses by the Company's international
subsidiaries in the United Kingdom, France and Japan. At July 31, 2001, the Company had $0.2 million, $0.1 million and $0.2 million in such receivables denominated in
British pounds, French francs and Japanese yen, respectively. The Company encourages prompt payment of these intercompany balances in order to minimize its exposure to currency fluctuations, but it
engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical ten percent change in foreign currency rates would have an insignificant impact on the Company's business,
operating results and financial position. The Company has not experienced material exchange losses on intercompany balances in the past; however, due to the substantial volatility of currency exchange
rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Pending Litigation

Beginning on July 1, 2000 and through October 2000, a series of class action complaints were filed in the U.S. District Court for the Northern
District of California, against Unify and certain of its directors and former officers. The plaintiffs in each of these actions claim to be suing on behalf of a class of persons who purchased the
Company's Common Stock during periods specified in the complaint. These actions have been consolidated and the court has selected lead plaintiffs' counsel. In April 2001, the United States
district court stayed the consolidated actions, pursuant to the stipulation of the parties to give the parties an opportunity to mediate the dispute in conjunction with other litigation discussed
below.

From
August through October 2000, five shareholder derivative actions were filed; four in the Superior Court of the State of California and one in the U.S. District Court for
the Northern District of California. The plaintiffs in these actions each claims to be suing on behalf of the Company. These actions name as defendants certain of the Company's present and former
officers and directors. The complaints allege substantially the same conduct, and concern the same time period, as the shareholder class actions filed in the U.S. District Court for the Northern
District of California. The complaints allege that, as a result of this conduct, certain of the present and former officers and directors breached their fiduciary duties to Unify and engaged in
improper insider trading. The complaints seek an unspecified amount in damages and injunctive relief. The action pending in U.S. District court has been voluntarily stayed by the parties pending
resolution of the derivative actions in state court. The parties to the derivative actions in state court have agreed to attempt to mediate the derivative actions in conjunction with the federal class
actions discussed above.

In
February and April 2001, two alleged institutional investors filed actions in U.S. District Court for the Northern District of California against the Company and its former
chief executive officer and former chief financial officer alleging violations of federal securities laws. The complaint alleges the
same conduct and concerns generally the same time period as that alleged in the shareholder class actions discussed above. The Company intends to seek mediation of these disputes with the other
pending litigation arising from the same alleged facts and circumstances.

In
June 2001, the Company participated in a day long mediation of the litigation discussed above. While the matters were not resolved during that day, the mediator is
continuing in his mediation efforts with the encouragement of the Company and it remains the goal of the Company to resolve all of the litigation. In July 2001, the Company determined that a
global settlement was likely and the estimated costs to settle such lawsuits have been accrued as of April 30, 2001. However, there can be no assurance that the proposed global settlement will
be approved by federal and state courts or that such complaints discussed above will be resolved without costly litigation, or in a manner that is not adverse to the Company's financial position,
results of operations or cash flows.

The
Company has become aware that the SEC and the Department of Justice are conducting investigations into the facts and circumstances surrounding the Company's restatement of its
quarterly financial statements and other matters. The Company is fully cooperating with the investigations.

Item 6. Exhibits and Reports on Form 8-K



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UNIFY CORPORATION

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|Date: September 13, 2001 |  | UNIFY CORPORATION (Registrant)
|------------------------ |  | ------------------------------
|                         |  | By:                           

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